the arms-race nature of consumption

On receiving a paypacket, how good a man feels depends on how much his colleague earns in comparison, scientists say. Scans reveal that being paid more than a co-worker stimulates the “reward centre” in the male brain.Traditional economic theory assumes the only important factor is the absolute size of the reward. But researchers in the journal Science have shown the relative size of one’s earnings play a major role.

In Brad’s world, a rich person conveys a type of negative externality, like pollution. High taxes on the rich can be seen as Pigovian. Economists like me complain that high tax rates on high earners discourage their hard work and entrepreneurship. The Veblenesque Pigovian economist replies, “Precisely!”

I must confess that I do not have a good retort to the argument. This is all the more problematic because there is some evidence that having rich neighbors reduces a person’s self-reported happiness. (See Luttmer and Weinzierl.) But I am uncomfortable making envy a basis for public policy.

It is claimed that some types of high-status goods, such as expensive wines or perfumes, are Veblen goods, in that decreasing their prices decreases people’s preference for buying them because they are no longer perceived as exclusive or high status products. Similarly, a price increase may increase that high status and perception of exclusivity, thereby making the good further preferable. The Veblen effect is named after the economist Thorstein Veblen, who first pointed out the concepts of conspicuous consumption and status-seeking.[1]

â€œThe worldâ€™s scientists and the UN are telling us that we may be in for a series of abrupt and irreversible climate catastrophes,â€ he notes, â€œThe onus is on us, the one billion most affluent people on the planet â€“ the upper 20% that consumes 80% of the worldâ€™s resources â€“ to rise to the occasion with an abrupt change in our lifestyles.â€

â€œWe have to not just start buying green, but start buying less. We can start by refusing to participate in the consumer frenzy this Friday and during the upcoming holiday season.â€

it was also difficult to not see the point of detractors who “charge that Buy Nothing Day simply causes participants to buy the next day”.

i suppose in order to make an actual argument to tie these things together here, i would need to be a lot more educated on economic issues and put a ton of work into a thesis. so i will just forego any pretense of thoroughness and deliver an armchair-quarterback opinion that maybe a consumption-based tax, rather than a higher income tax on wealthier people, would help address some of these problems in a more sustainable way (if these are indeed problems, and my observation is they are).Â [i apologize for using "sustainable", which i feel is getting to be a severely overused word.]

3 thoughts on “the arms-race nature of consumption”

The problem is that the current consumption tax model, the sales tax, regressively penalizes people with lower incomes who spend more of their earnings on taxed goods, leaving them with both less money and less to invest. Somebody like me who makes, when he’s lucky, $40,000 in a year spends much higher ration of that income on sales tax than someone who makes $100,000 a year, and they spend more than someone who makes $400,000 — because those people invest higher proportions of their income as opposed to spending them on salable goods.

Now, if there could be a sort of “luxury tax” that taxed items in the upper register of a price bracket relative to similar items, that could serve to both tax only upper-income spenders and reduce the Veblen effect on luxury items, depressing the urge to overprice items to make them more apparently exclusive (and feed profits into products that are more heavily advertised and therefore tempt people to spend beyond their means).

what i was thinking was more along the lines of abolishing the income tax, replacing it with only a sales tax, and having some kind of system to give credits for that tax to people in lower income brackets.